Strong Dividend Stocks Can Change Your Retirement Odds

With the stock market powering ever higher, dividend yields continue to fall on most stocks. This will lead many investors to simply search for high yielding stocks and buy those. But this could be a major mistake.

Most times when a stock’s dividend yield is high, it’s high because the stock and the dividend payments are risky. Remember, dividends can be cut at any time by a company. So what is the solution?

What dividend investors should really be looking for is strong companies with a long history of never cutting their dividends. This along with a relatively high dividend yield can set you up for retirement.

I’ve put together a list of some of my favorite companies who have shown they will not cut their dividends and in fact, usually increase them. See the list below:

Data as of 12/26/17.

The average dividend yield of 4.2% is nearly double what you will find in the S&P 500, and these are solid companies with a history of increasing their dividends over time.

Running Dividends Through Monte Carlo Simulations

Finding these types of companies who continue to pay out dividends can increase your chances of never running out of money. The best way to analyze this is using a Monte Carlo Retirement Calculator.

We ran a typical retirement plan our planning software, WealthTrace, which you can use as well. We assumed the couple is invested in the S&P 500 index fund. We made an assumption of 8% annual returns and 25% of that return comes from dividends. The probability of this couple never running out of money is 64%. You can see the simulations below.

A 63% chance of never running out of money is a little too stressful. What if we move all of their money into the solid dividend portfolio I mentioned earlier? Well, the dividend payments are more stable than capital gains so the volatility of returns falls. This leads to a much better Monte Carlo result of 89%.

Why Dividends Matter So Much

When the return on stocks depends so much on the price, the return is naturally more volatile. But strong companies with a long history of paying out dividends, while increasing those dividends, see less volatility over time. Put another way, the constant income stream from dividends makes it much easier to predict the future of your income and overall retirement plan.